For Bitcoin 'Moon,' Just Wait Till Institutional Investors Show Up

When moon, as cryptocurrency enthusiasts often ask each other. Soon as institutional investors come in. And they will, once the regulatory framework makes trading and owning Bitcoin and other cryptocurrencies as legally secure has holding gold futures and foreign currencies. (Shutterstock)

Bitcoin is going to $14,000, bulls say. That’s the tamest call. Tim Draper thinks it goes to $200,000 by 2022. Others in the market, like Forbes columnist and London’s ThinkMarkets strategist Naeem Aslam, think $50,000 by December is doable.

They mostly say it is because of news of exchange-traded funds getting closer to getting greenlit by the Securities & Exchange Commission. They also cite market-friendly regulations that make real-money investors think the top cryptos can be traded with investor protections, no different than gold futures and forex. Those regulations give investment advisors with fiduciary responsibility to a client an impetus to put money to work in crypto.

Once Bitcoin is regulated as a security, when institutional investors follow in the footsteps of high-net-worth individuals and hedge funds already in crypto, then this market goes to the moon.

To put it in cryptocurrency cult vernacular: “when moon?” Soon as Harvard and the Ford foundation decide that a quarter-percent allocation to Bitcoin and other top 10 coins is plausible, that’s when.

“You already have professors looking at how to value cryptocurrencies like a traditional security,” says Bitcoin skeptic and Acadian Asset Management strategist Philip Owrutsky. We were at the Palms in Boston on a fall-like day in June, in sweaters, complaining about the weather. An impassioned debate on Bitcoin kept us warm.

“I’m not convinced Bitcoin eventually becomes the lead, global cryptocurrency,” he tells me. “And I’m not convinced that institutional money is going into it. But they are inquiring about it, that is for sure.”

On Tuesday, the Securities & Exchange Commission postponed its decision on Direxion’s new Bitcoin ETF. The Massachusetts-based fund company, known for its double-leveraged ETFs, will have to wait until September for a decision.

Something is in the water, though.

San Francisco-based Bitwise Asset Management wants to surf Direxion’s wake. They filed with the SEC on Tuesday, the WSJ reported.

Sustany Capital, a Newport Beach crypto and blockchain investment firm, recently conducted a survey of 1,000 U.S. adults regarding attitudes toward cryptocurrencies. The report will be published in a few weeks. But one of the takeaways is that 88% of Millennials said they will buy crypto because they think it is a good investment.

Millennial investors: Give me Bitcoin. (Shutterstock)

The Millennial generation is the biggest generation in the workforce, according to Pew Research. They are also the largest generation since the Baby Boomers.

“I’d say that there is little to no appeteite to put client money into digital assets right now,” says Michael Chang, managing director of the Strategic Advisory Group at Wachsman, calling in from a Switzerland Crypto Value Conference. Chang is like many others in finance—he left Jefferies to do a deep dive into the unknowns of crypto land.

“When you’re a bank like Jefferies, you have responsibilities to your clients. If you want crypto, you have to go to the specialist firms like a Pantera or a Soros Management, which is now investing in it through a separate fund. A lot of these guys have money in the big 10 coins now,” he says.

Europe is all over this. Switzerland in particular.

The adoption rate there is higher than it is in Europe, with roughly one in 1,000 people owning Bitcoin.

Billionaire Anthony Di Iorio, cofounder of Ethereum, stands for a photograph on the terrace of his newly purchased penthouse suite at the St. Regis Residences in Toronto, Ontario, Canada, on June 21, 2018. Di Iorio hasn’t stoppled looking for bargains in the digital-currency world after amassing a fortune of about $1 billion from his early investment in Bitcoin. Photographer: Cole Burston/Bloomberg

“Bitcoin used to be immeasurable in market size, but is now about 1% of the gold market—a traditional hedge against currency—and 1% of the multitrillion-dollar gold market is not a small thing," says Niklas Nikolajsen, co-CEO and chairman of Bitcoin Suisse, a regulated cryptocurrency broker in Zug, Switzerland.

The combined turnover for Bitcoin Suisse in its first year of operation was less than $10 million. Now they claim to do that in a single day. Their average turnover in the fourth quarter of 2017, when Bitcoin hit an all-time high of $20,000, was $750 million a month, Nikolajsen told me.

Around half of this is coming from professional investment managers, including European institutional investors.

“We are not directly exposed to what is happening in the U.S., but two of the largest banks, such as Goldman Sachs, are involved in the space now,” Nikolajsen says. Goldman Sachs has a subsidiary invested in a crypto exchange. And they are opening a cryptocurrency trading desk. In Europe and Asia, there are a number of smaller banks, asset managers and midsize family offices investing client money in crypto. “Institutional engagement it is limited,” Nikolajsen says. “But whereas it used to be zero, it is now well above that.”

Bitcoin has a lot of growing pains ahead. There is no central bank printing out metal coins. Computers can only make so many digital coins in a day. In other words, Bitcoin is finite, more finite than gold. This also happens to be one of the reasons why crypto evangelists like Draper think Bitcoin prices go much higher than where they are today.

Making a bitcoin is a matter of many 0’s and 1’s. Something for CalTech graduates to ponder, and not most mere mortals. The computer power needed to make more Bitcoin requires energy.

If Bitcoin were a country, its power consumption would be on par with Denmark, ranking 59th in the world. A single bitcoin transaction could power an American home for about a week, according to Acadian’s Owrutsky.

Bitcoin consumes the same amount of power as 2.8 million Americans. Owrutsky estimates that the true cost of a Bitcoin transaction is about $20, over and above any fees directly charged. That’s over 1,000 times the cost of a credit card transaction. This calls into question the sustainability of Bitcoin’s “proof-of-work” based blockchain.

“Bitcoin will have to evolve its algorithm to mitigate the cost per transaction,” Owrutsky says over lunch. “I think it won’t be enough, really. I think Bitcoin-related electricity consumption will even go higher. They may need to change Bitcoin’s core paradigm or it risks being beat by a competing coin with less resource requirements,” he says.

Maybe it’ll be Ether or Cardano coin or whatever other coin is out there. New coins are issued all the time. Valuation models are being constructed. This is a work in progress, and it is progressing quickly.

The initial coin offering market has venture capital firms creating new funds of startups, buying their equity, and buying their coins. It’s a whole new world for VC.

But crypto also might disrupt the initial public offering business as well, as companies test raising private equity under existing SEC rules for their blockchain startups.

Steve Waterhouse, partner at Pantera Capital. Specialty funds are the vehicle of choice for high-net-worth individuals looking to include cryptocurrencies as part of a diversified investment portfolio. Photographer: Chris Ratcliffe/Bloomberg

“The larger, more legitimate projects will want to attract institutional money while the government comes in and plays whack-a-mole on egregious violaters,” says Ryan Singer, ex-founder of early-entrant cryptocurrency exchange Tradehill and now the founder of Chia Network. They are filing a Reg-A public offering to raise—they hope—up to $50 million in equity for their company.

In May, during a private cocktail party for a Russian-developed cryptocurrency, Tim Draper’s big head appeared on a TV screen. I think he might have been wearing a tie with Bitcoin logos on it. He was taking some questions from a host. Bitcoin was in the tank, trading under $5,000 compared to the $20,000 it was trading at just five months prior.

Was Bitcoin going go $2,000? He skoffed at the thought. Who knows?

Will the big investors come in? They already are.

When moon? (God, I hate that stupid saying.) Maybe 2022. But that’s something for rocket scientists to debate over and the CalTech computer wizards—the Harry Potters of algorithms and coding.

Here was Draper’s final thought on Bitcoin’s future; a jab to the naysayers.

“If you asked me would I rather trade my Bitcoin for fiat today,” he says, answering quickly, “I will tell you that would be like asking a gold trader if he’d trade his bullion for seashells.”

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I've spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes.